IEEJ：August 2021©IEEJ 2021
Special Bulletin
A Japanese Perspective on the International Energy Landscape (546)August 20, 2021

Conflict between Energy Market Liberalization and Energy Security/ClimateInitiatives
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
This week, I had an opportunity to discuss various energy issues with energy experts,
energy policy makers and energy industry people in Japan and other countries on an online basis.
The most impressive point at the discussion was the relationship or tradeoff between energy market
liberalization and major market externalities including energy security and enhanced climate change
countermeasures, as indicated by the title of this report.
In Japan, discussions on the sixth Strategic Energy Plan have reached the final stage. As iswell known, the Strategic Energy Plan in principle seeks to simultaneously pursue the 3E’s – energy
security, environment protection and economic efficiency – on the premise of safety based on sincere
regrets over the Fukushima nuclear plant accident. Specific indexes for the 3E’s targets are theenergy self-sufficiency rate for energy security, the greenhouse gas emission reduction target
regarding the environment and the electricity cost for economic efficiency.
Regarding economic efficiency, however, discussions on the Strategic Energy Plan
indicate that the concept of using market forces has played key roles. The 2002 Basic Act on Energy
Policy, on which the Strategic Energy Plan is based, sets out three guiding principles – thesecurement of stable energy supply, environmental compliance and the use of market forces. The last
principle means that Japan should promote market deregulations, promote market liberalization andexpand competition under the recognition that the improvement of energy market efficiency is key toresolving energy issues.
Global energy market liberalization began to make progress as a global trend under theU.K. and U.S. leadership in the 1980s. Japan launched the liberalization of the oil market in thesecond half of the 1980s and that of the electricity and gas markets in the 1990s. The oil market
liberalization was completed as the Petroleum Industry Act was abolished in 2002. Since then,electricity and gas market liberalization has remained a key challenge. There have been various
backgrounds behind the electricity and gas market liberalization. After reviewing its overall energy
policy in response to the 2011 Great East Japan Earthquake and Fukushima nuclear plant accident,
the government decided to complete electricity and gas market system reforms.
Since then, the electricity and gas markets have gradually been liberalized through suchmeasures as the full deregulation of retail sector and the legal separation of the network division,
with consideration given to the two markets’ characteristics. New entries into the retail market haveforced traditional market participants to lose their market shares. The wholesale electricity market
has been remarkably vitalized, leading to dramatic changes in the competitive situation. As the useof market forces has made progress, Japan’s electricity and gas markets have become morecompetitive than ever before. In the abovementioned oil market liberalization, a structural decline inoil demand and intensified competition have led to mergers and integration. After dramatic changes,
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Japan’s oil market is now dominated by two major groups.
In this way, the use of market forces has steadily been promoted along with theenhancement of stable energy supply and climate change and other environmental measures, whichis extremely important for Japan (and any other country in the world). Complicatedly, however, thepromotion of liberalization through the use of market forces has a tradeoff relationship with market
externalities such as energy security and climate change measures.
Costs are a key point for considering this relationship. Essentially, the use of market forces
and market liberalization promote competition to increase efficiency. Market players exposed tocompetition must promote thorough rationalization to cut costs and enhance competitiveness fortheir survival. They review their assets, eliminate wastes and cut unnecessary surpluses whileconsidering their future growth strategies. It is obvious that cost-cutting pressure is strong in any
essentially competitive market. However, stable energy supply and environmental compliance can beattained through specific measures. If left to market forces alone, they cannot be attained. Additional
measures or costs are required to attain stable energy supply and environmental compliance. If
additional equipment or supply chain redundancy is required to secure stable energy supply,
additional costs are inevitable. If costly innovative technology options are required to counterclimate change, additional costs are indispensable. In this way, costly measures for market
externalities conflict with cost-cutting pressure in a competitive liberalized market.
As a matter of course, individual companies as market players are required to adequately
secure stable energy supply and respond to climate change and other environmental problems,
positioning costs for such measures as the prerequisite for their business strategies or survival.
Essentially, however, market externalities must be handled mainly by the government sector. This isbecause energy security is a national requirement, with climate change and other environmental
conservation measures being a national or global requirement. The government sector is required tomake and implement national policies for energy security and climate change prevention inconsideration of national or global interests. In this way, additional costs emerge according to thestrength of required national policies.
Basically and finally, additional costs are shouldered by the government sector ortaxpayers as consumers. The government sector compares such additional costs with benefits forenergy security and climate change prevention and implements policies to allow such benefits toexceed additional costs. To citizens or consumers who finally shoulder additional costs, thegovernment sector must explain that additional costs are required for energy security and climatechange prevention and that benefits from such costs would exceed the costs.
Whether additional costs are shouldered by taxpayers finally, such costs accompany
specific energy market measures and must initially be shouldered by market players to implement
these measures. For market players exposed to cost-cutting pressure in a competitive environment,
therefore, there is a tough conflict between the additional costs required to respond to market
externalities and such pressure. The toughness of the conflict depends on how strong energy security
and climate change measures are or how much additional costs are for these measures. When
implementing strong energy security and climate change measures, the government sector must takeleadership in designing markets and institutions adequately while gaining citizens’ fullunderstanding about their cost burdens. The globally seen “big government” trend is designed torespond to the market externalities. The government sector will thus be required to consider carbon
neutrality and other new policies while giving consideration to the use of market forces and the2

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liberalization of markets.
Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

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